The Third District Court of Appeal of the State of Florida recently affirmed the entry of summary judgment in favor of a mortgagee and against the purchaser at a condominium association assessment foreclosure sale based on the after-acquired title doctrine.

A copy of the opinion is available at: Link to Opinion.

In July 2007, the borrowers obtained a mortgage loan secured by a condominium unit at a luxury building in Miami Beach.

Although the mortgage contained the usual covenant that the borrowers owned legal title to and had the right to mortgage the property, the property was in fact owned by a corporation at the time of the deed.  The corporation conveyed title to the borrowers five days after the mortgage transaction took place.

In 2010, the condominium association sued to foreclose its lien for unpaid assessments, eventually obtaining title to the property as the highest bidder at the condominium association foreclosure sale. It then sold the property to a limited liability company in 2012.

In April 2013, the mortgagee sued to foreclosure its mortgage, naming the borrowers, the new owner, and the condominium association as defendants, among others.

The new owner filed a counterclaim for declaratory relief and to quiet title, arguing that the mortgage was void ab initio because the borrowers did not own the property when they signed the mortgage.

The parties filed cross-motions for summary judgment, and the trial court granted the mortgagee’s motion, holding that the after-acquired title doctrine applied to properly secure the mortgage. The new owner appealed.

On appeal, the Court explained that “[u]nder the doctrine of after-acquired title ‘if a grantor purports to transfer ownership of real property to which he lacks legal title at the time of the transfer, but subsequently acquires legal title to the property, the after-acquired title inures, by operation of law, to the benefit of the grantee.”

Describing the doctrine “as a species of estoppel by deed,” the Appellate Court noted that “it has also been characterized as a doctrine grounded in the covenant or warranty of title made by the grantor when conveying the property” and that the doctrine “applies to mortgages.”

The new owner argued that the doctrine “does not apply as against a non-party to the original mortgage and subsequent purchaser of the subject property,” and that it “is not a privy or successor in interest” and was not bound by the borrowers’ mortgage or the transaction by which they subsequently acquired title.

The Appellate Court disagreed, concluding that the new owner “is bound, as a successor in interest, and estopped to deny the existence of title acquired by [the borrowers] after the mortgage was executed.”

First, the Court pointed out that the new owner had notice of the recorded mortgage.

Second, the Appellate Court reasoned, based on a long line of case law going back to 1918, that “[i]t is clear from the case law that the after-acquired title doctrine ‘inures to the benefit of the grantee,’—here [the plaintiff successor in interest]—and that the covenant also ‘runs with the land,’ … binding those who are successors in interest to the grantor as well as the grantee.”

The Court also rejected the new owner’s argument that the after-acquired title doctrine did not apply “because the original transaction was a purchase money mortgage.”  The Court reasoned that although “[u]nder Florida law, a ‘purchase money mortgage given as part of the transaction in which the premises were purchased is an exception to the general rule that, where a mortgage contains full covenants of warranty, title acquired by the mortgagor after the execution of the mortgage inures to the benefit of the mortgagee,” the exception did not apply to the transaction in the case at bar.

Although the mortgage at issue bore the name “purchase money mortgage,” the Appellate Court held it was not “the type of transaction contemplated by the Florida Supreme Court when it established this exception to the doctrine of after-acquired title.” The new owner conceded that the transaction at issue did not involve the typical purchase money mortgage, where “the mortgage is given by the buyer of the property to the seller of the property to secure the unpaid balance of the purchase price, and the conveyance and mortgage are executed simultaneously.”

Citing Florida Supreme Court precedent, the Court noted that the exception “ ‘is based on the idea that it would be unjust to allow a purchase-money mortgage to be foreclosed on any greater title than the seller had conveyed, merely because it contained a covenant of warranty.’ ”

In other words, in the Florida Supreme Court’s use of the term “purchase money mortgage,” the mortgagee of the property is also the seller of the property, and that individual knows whether he is in fact lawfully seised of the property and able to convey full title.  Upon foreclosing, the pre-existing case law holds, a seller-mortgagee should not be permitted to obtain greater title than he could originally have conveyed.

Because in the case at bar, the original lender loaned money to the borrowers “in exchange for a mortgage on property which [borrowers] thereafter purchased from a third-party in a subsequent transaction,” the Court concluded that “the purchase money mortgage exception to the after-acquired title doctrine does not apply to the instant case.”

Accordingly, the trial court’s summary judgment in favor of the lender’s successor in interest was affirmed.